Conference Paper
Equity and bond market signals as leading indicators of bank fragility
Gropp, Reint; Vulpes, Giuseppe; Vesala, Jukka M. (2002)
We analyse the ability of equity market-based distances-to-default and subordinated bond spreads to signal a material weakening in banks' financial condition. Using option pricing, we show that both indicators are complete and unbiased indicators of bank fragility. We empirically test these properties using a sample of EU banks. Two different econometric models are estimated: a series of logit-models, which were estimated for different time-leads, and a proportional hazard model. We find support in favour of using both the distance-to-default and spread as leading indicators of bank ...
Conference Series ; [Proceedings]

Journal Article
Market indicators, bank fragility, and indirect market discipline
Vulpes, Giuseppe; Gropp, Reint; Vesala, Jukka M. (2004-09)
As a theoretical matter, signals from the bond and equity markets satisfy minimal requirements for a useful indicator. Using option pricing formulas, it is shown that a distance to default measure, based on equity market value and equity volatility, increases with the market value of bank assets and decreases with bank leverage and equity volatility.
Economic Policy Review , Issue Sep , Pages 53-62